'Stock Market Set to Crash'

[SWM 41]

Excerpts:

"General Electric – which is really just a hedge fund disguised as an industrial concern at this point – is leveraged thirty to one. It's a dead man walking. It's the next AIG."

"The government has been suppressing interest rates for a long time now, which is exactly the opposite of what they should be doing. These artificially low interest rates discourage people from saving and encourage them to gamble, hoping to outrun inflation. But eventually the market will force interest rates to go higher, and that will kill the stock market, because the stock market does tend to fluctuate inversely with interest rates. High interest rates almost always mean a low stock market, and low interest rates tend to mean a high stock market. So it seems to me that there simply is no good news on the economic front. Interest rates are headed way up, both out of a need for capital and as a reflection of the high price inflation ahead."

"As the government takes over more and more of the economy, they'll mismanage that activity, as they always – necessarily – do. Why do I say necessarily? Because they do things that are politically productive for them, not economically productive for society. That's going to hurt productivity and profitability, misallocating and even destroying capital wherever they stick their noses. And, today, that's absolutely everywhere."

"Taxes, of course, will go way up. That's going to give individuals less money to buy stocks. Corporations will have less money left over to reinvest or pay dividends with. All the draconian new rules they're enacting in response to the crisis will only serve to inhibit entrepreneurial activity and investment. "

"interest rates are like any other market; they are prices set by buyers and sellers. More buyers of bonds (bills, whatever) drive down interest rates. So, if the Federal Reserve comes in and buys bunches more of this stuff, yes, the immediate and direct consequence will be lower interest rates. But the indirect and delayed consequence will be vast quantities of new dollars, which is the actual cause and definition of inflation, and as a result, the market is going to demand higher interest rates in the U.S., just as it did in Zimbabwe.

Don't forget that the U.S. government is going to run another trillion-dollar-plus deficit this year, plus they have to roll over another trillion of maturing paper. Who's going to buy all that? Nobody – unless rates go much higher. Or the Fed buys it with newly created dollars."

"Most people simply do not think in these terms, so they are going to be blindsided. They listen to what they hear in the news, read in the papers, get from government pronouncements… Green shoots, things are getting better… To me it's so wrong-headed what the governments are doing, it's not just ignorance, it's deliberate…"

http://www.lewrockwell.com/casey/casey37.1.html

[gregory]

Regardless of one's politics - there are a number of comparisons being drawn between what is happening present day versus the 1929-1932 period. In my mind, the stock market is way ahead price-wise of what the fundamentals justify ... and so I think a very reasonable possibility of a large correction in the stock market looms large between now and March 2010.

The question is - what do you do about it? I bought the ETF GLD back in roughly October 2008, and recently added the ETF SLV. GLD tracks gold as a commodity, and SLV tracks silver. The idea is that precious metals such as gold and silver have been known to act as safe-havens when a currency devalues/inflation ramps up.

One other thing I own is a 3X leveraged inverse ETF called SDS which is a triple inverse of the S&P 500. Owning SDS is what is called a "bear bet" - you buy it if you believe the market is heading down. I'm not sure I'd recommend anyone simply going out and buying SDS though ... since it is a 3X leveraged fund, if the S&P goes up then you lose your money fast. Maybe a good way to get into it would be to set up triggered trades that buy shares at laddered levels that start at $3/share higher than the current price, then another triggered trade at $3/share past that point, etc. Every time you purchase shares of SDS, set a Stop Market Sell condition that defines your maximum loss if the market does the opposite of what you expect. If you own SDS, you are gambling and have to be prepared to lose all that you toss in. But it is a solid way to make a bear bet.

Cash or CDs are still the safest things to own right now, however you lose money on them as the dollar devalues or as inflation rises. Bonds have been attracting a lot of money lately - but they are in a bubble, and since interest rates can only go up in the future, bond prices will fall ... so I don't believe now would be a good time to add money into bond funds.

It is difficult to know the best place to put your cash right now. Maybe the best thing to do is not to put it all in one spot.

[SWM 41]

As predicted here less than three weeks ago:

Stocks tumble on worries about jobs, European debt

NEW YORK – Stocks buckled Thursday under the growing belief that the global economy is weaker than many investors expected and likely to stop companies from hiring. The Dow Jones industrials briefly traded below 10,000 for the first time in three months.

A flood of bad news, including rising debt levels in European nations and an unexpected jump in the number of Americans filing for unemployment benefits, had investors pulling money out of assets like stocks and commodities that look increasingly risky. Fears of more disappointing news Friday, when the government issues its January employment report, added to the selloff.

http://news.yahoo.com/s/ap/20100204/...us_wall_street